Has local government’s love affair with electricity fizzled out?

The news that Bristol Energy, one of the country’s largest council-owned energy companies, is up for sale has raised questions about what kind of role local authorities should play in the energy market.

Step back in time five years and the chatter in local government circles was all about energy, or rather the idea of going into business and supplying their residents with electricity.

At the time, council-owned energy companies were seen as a game-changer, which would help usher in a new era of renewable energy, tackle fuel poverty and, whisper it quietly, raise a bit of money for cash-strapped local authorities in the process.

The omens were certainly good. Two local authorities — Bristol City Council and Nottingham City Council — went all in and formed fully-fledged energy service companies, and other councils used existing energy companies to provide the back office for their own ‘white label’ businesses.

But neither Robin Hood Energy (Nottingham City Council) or Bristol Energy have turned a profit since they started operating, and local government’s love affair with energy appears to have cooled in the last 12 months.

In September last year, Portsmouth City Council pulled the plug on the ill-fated Victory Energy, after it failed to find a buyer for the company, which never actually traded in the first place.

In March, Robin Hood Energy posted a loss of £23.1 million for the 2018/19 financial year.

Nottingham City Council is currently carrying out a strategic review into the firm, and the results are expected later this summer. And last month, after much speculation, Bristol City Council announced it was putting Bristol Energy up for sale, after commissioning Ernst & Young to conduct an assessment of its viability.

With local government finances under increasing strain from the cost of dealing with the COVID-19 pandemic and the increasingly competitive nature of the energy supply market, there has been mounting speculation that the days of the council energy company are at an end.

Speaking to Air Quality News, renewable energy consultant Stephen Cirell says while he believes the concept of a municipal energy company remains perfectly valid, particularly in terms of fighting fuel poverty in the local community, the ‘simple economics and commerciality of running these companies’ has proved to be a problem.

‘If you look at the nitty-gritty of running an energy supply company, you realise you have the risk of getting customers, getting electricity to sell to them and keeping the cash flow going.

‘The “Big Six” energy companies are involved in energy generation, distribution and transmission, as well as supply. They might look like they are doing really well, but they are not making much money from their supply businesses.

They can buy gigawatts of electricity well in advance, because they know they have the customers to sell it to.

‘It is getting harder and harder to get into electricity supply,’ adds Cirell. ‘Around 20 energy supply companies have gone bust in the last 18 months and the reason is cash flow. They can’t buy the electricity as cheaply as the big companies. They are like corks bobbing around in the sea, while the “Big Six” are big liners who are not being rocked quite as badly.’

Ted Hopcroft, energy expert at PA Consulting, says there has been a big shift in the energy supply market from the ‘Big Six’ to a more crowded marketplace, with more smaller and medium-sized suppliers.

‘The sheer number of smaller suppliers makes it hard to establish a brand and hence critical mass,’ says Mr Hopcroft.

‘Council-owned companies may be limited by their brand — e.g. “Bristol Energy” implies a certain geographic focus, although some white-label their services. It may also be hard for a smaller supplier to obtain and retain the skills in trading and hedging to ensure a stable, profitable energy supply; newer smaller companies tend to have fewer sticky customers, which make energy purchasing more challenging,’ he explains.

‘Local authorities do some excellent work with vulnerable customers, for example, Bristol Energy’s support for the Warmer Homes and Money (WHAM) project, but they may tend to attract less profitable customers. Bad debt arising from COVID could be an additional challenge for council-owned customers,’ says Mr Hopcroft.

It’s not all doom and gloom, though. One local authority, Warrington BC bucked the trend in October last year when it announced it had invested £18m into the Scottish firm Together Energy, because of its ‘unique industry business model’.

‘We’ve long had an ambition for Warrington to help address fuel poverty in the borough and also to help move towards green energy,’ explains the council’s deputy chief executive and director of corporate services, Lynton Green.

‘It was clear that Together had a similar ethos, from their employment and training of the unemployed to being a real living wage employer too. Working closely with a company that was already seeing steady growth was a way of Warrington addressing these issues more quickly.

It also gave us an opportunity to use the energy generated through our solar generation assets back into Warrington for the benefit of our residents, although initially we will be using the power from our Hull solar farm to power the council.’

But Mr Green adds it has not been ‘an easy course to navigate’.

‘I think whilst other authorities have entered the energy market earlier, Warrington has been able to learn from their difficulties,’ he says.

‘But buying into a small existing supplier has avoided some of the riskier parts of setting up a new energy company. Our experience has been developed through investments in renewables, and that has helped us join up the two things.

I can certainly see more councils getting involved in energy generation, but the opportunities for entering the supply market are less likely, although we would be willing to discuss with other councils how we, through Together, could support them with their own white-labelled energy company.’

Mr Cirell agrees that investing in renewable energy generation is a different financial proposition altogether.
‘Building a solar farm is a piece of cake, compared to running an energy supply company. The prices have dropped so much.

When I was in Cornwall in 2010, we planned a 5MW solar farm for around £12m capital cost. That same solar farm now will cost you £3m. So, for that amount, plus grid connection and planning costs, you could have a solar farm that will make you an 8% return for 25 years, virtually guaranteed. You won’t have any nasty surprises.’

Sebastian Just, commercial director at Aurora Energy Research, adds that while investing in renewable energy is ‘not without risks’, projects like solar farms can provide local authorities with a ‘relatively stable income’.

‘The renewable energy market is growing and there’s a growing desire on the part of local authorities and other organisations to become sustainable, which is helping to drive the market and to get closer to the Net Zero. We will see more renewable projects, it’s a question of whether local authorities will be part of this.’

Council finance chiefs are going to have a busy few months, particularly in the aftermath of the COVID-19 crisis. As well as additional costs for PPE and social care, Westminster is rife with rumours that the Treasury is about to limit how councils can invest in property and other large-scale schemes.

The news about Bristol Energy will almost certainly make local authorities think again about entering the energy supply business, but generation could yet prove to be a lucrative market.